Taking on the global energy investment challenge

Governments can use policy measures alongside relatively small sums of public money to catalyze the private sector to help developing countries finance their clean energy transition.Photo: Center for American ProgressInternational negotiations on a comprehensive climate change treaty made limited progress this year, yet global investments in clean energy in both developed and developing countries alike continue apace. Ironically, there is a positive connection between the two — despite the slow pace of negotiations to produce a comprehensive climate treaty, the discussions have produced a continuing and evolving commitment in the international arena to help developing countries finance their transition to a clean energy economy.

A new report released today, “Investing in Clean Energy,” from the Center for American Progress and seven other global think tanks that comprise the Global Climate Network, provides a progress report on commitments to clean energy development in several sectors in China, India, Nigeria, and South Africa. Our report estimates the total cost over the next decade for achieving these targets, and then offers recommendations on how best to use public funds that may become available in the creation of a global climate fund to leverage the private capital needed to meet these goals.

Before detailing our findings, some history about the global climate fund. One of the items agreed to as part of the Copenhagen Accord at the U.N. climate summit in Denmark last December was a commitment to raise $30 billion from developed countries for “fast start” financing for these projects in developing countries between 2010 and 2012, with the goal of generating $100 billion in new capital annually by 2020. The money would be deployed toward enhanced mitigation of carbon pollution, technology development, and adaptation to a warming world.

The accord stops short, however, of determining the ratio of funds that will be spent on mitigation and adaptation, respectively, and of identifying any specific mechanisms or sources of finance other than “public and private, bilateral and multilateral, including alternative sources.” Later this week, however, a special report from the U.N. Advisory Group on Finance — an informal but high-level group of heads of state, experts, and finance ministers — will provide a more comprehensive look at the instruments that could be used generate these funds.

Our report complements this forthcoming U.N. Advisory Group report by demonstrating that significant amounts of additional funds will be necessary to achieve a successful, global low-carbon transition for long-term climate protection. Private finance is undoubtedly needed. According to the World Bank, additional annual capital costs for mitigation in developing countries will range between $265 billion and $565 billion by 2030. We find that investments in the sectors and countries highlighted in this study must double if current government ambition for renewable energy expansion is to be achieved.

Indeed, excluding China, the average annual investment needed is $15.93 billion, yet the financing gap is around $15.73 billion in India, South Africa, and Nigeria, all of which are currently only investing a tiny fraction of what would be required.

Take India, which is embracing substantial targets to decrease their emissions and shift to a low-carbon growth strategy. The Indian government’s Eleventh Five-Year Plan includes a renewable energy target of 10 percent of total power generation capacity, with 4 percent to 5 percent of the final electricity mix to be achieved by 2012. If these goals are met, then renewable energy would account for approximately 20 percent of the total added energy capacity planned in the 2007 to 2012 period. Toward the same goal, India expects to install 15 gigawatts of additional renewable power capacity by 2012.

The Indian government has allocated $850 million of public finance to support renewable energy under the Eleventh Five-Year Plan, including $16.2 million for wind power demonstration projects and $43.3 million in subsidies to support grid-interactive solar photovoltaic power generation infrastructure. Yet the total capital investment required to achieve the plan’s target of 15 gigawatts of installed renewable electricity by 2012 are likely to be significantly higher.

Using estimates of capital and generation costs calculated by the Indian government’s Integrated Energy Policy-Expert Committee, our report finds that between $9.5 billion and 12.7 billion will be required between 2007 and 2012 if the 2012 target is to be met. This will require leveraging as much as 15 times the budgetary support currently provided by the Indian government in the form of private investment. Follow-up interviews with government officials and clean energy investors in each country participating in our study point to the hurdles and possible solutions needed to build the needed renewable energy infrastructure by tapping private capital. In most countries, the majority of participants suggest that the primary barrier to private sector low-carbon investment was the absence of clear and stable national policies.

Inadequate regulation and standards (South Africa, China), lack of incentive policies (South Africa), the absence of market mechanisms and a price on carbon (China), and failure to implement existing policies (Nigeria) were all cited. Nonetheless, participants in several countries (India, China,) suggest that financial instruments deployed by governments at the national level to date have been quite effective in stimulating private investment in low-carbon energy projects despite limitations in the policies.

The types of instruments that have been successful so far differ depending on a country’s unique circumstances. In India, for example, feed-in tariffs for renewable-sourced energy have been important. In China, requirements on banks to phase out loans to high-carbon emissions sectors have been very effective. Clearly, if the balance of risk and return is acceptable then the private sector will invest. Indeed, participants in the national dialogues held by the various partners in our study suggest there is no lack of enthusiasm or available capital for clean energy. Yet our unequivocal finding is that government intervention will be needed to ensure the private sector’s perception of risk does not exceed its expectation of return.

In effect, clean energy investment requires a public-private partnership. Governments can use policy measures alongside relatively small sums of public money to catalyze private sector participation, enabling government involvement to help reduce the perception of risk, and consequently actual risk, among private sector investors. We propose that governments building the proposed $100 billion climate fund should foster an investment partnership with the private sector. Our report proposes several leveraging mechanisms, such as loan guarantees, subordinated equity investments, and policy insurance, which together could be the basis of this partnership. These tools will help lower costs in two ways.

First, lowering the cost of capital will bring down incremental costs. Developed country government-sourced subsidies and guarantees to help private investors finance clean energy in developing countries will reduce the costs of borrowing. The reason: Cheaper capital i
n most clean energy sectors means lower incremental costs generally.

Second, deployment on a large scale will drive down technology costs. A public-private partnership for clean energy investment should lead to a rapid increase in the pace and scale of deployment, which in turn would lead to technological, technical, and business innovation — learning by doing — and so bring down the currently high relative unit costs of clean energy.

There are some participants in the international climate community who criticize the deliberations of the U.N.’s Advisory Group on Finance because it focuses too much on generating private investment out of public capital. Our report demonstrates that the clean energy investment challenge will only be solved through coordinated public and private effort. This investment challenge is now the world’s greatest innovation challenge.